Failure Rates

Sunday, January 31st, 2010

First Year Failure Rate (%)

Real estate sales 86%
Day trading 80%
Training for a marathon 70%
College 33%
Restaurants 26%
Teaching 13%

Sources: Realty Times; Barber, Lee, Liu, and Odean; American College of Sports Medicine; ACT; Ohio State University; and the National Center for Education
Statistics

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Financials Ready For A Move Lower?

Friday, January 29th, 2010

The Financials have had a huge move off the bottom and now they have consolidated for the past 6 months. My suspicion is we will test the bottom of this range and bounce in the next few days. If the 65 level is broken definitively to the downside then the stock market as a whole and the economy are probably in big trouble.

Check out this chart of the FAS ETF:

If FAS can close below 65 it paves the way for a move down to the 35-40 area. I have no idea if this is going to happen but that is the chart set-up as it sits now. The more charts I look at the more I think we are in for real rough ride in 2010. A rough ride means sloppy ups and downs, we shall soon see…

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PIGS, the Trigger Point For A 2010 Collapse?

Friday, January 29th, 2010

Are the PIGS, Portugal, Italy, Greece, and Spain, going to be the trigger point for a 2010 economic collapse? I think they might possibly be with Greece on the verge of a sovereign debt default. Here is an article in today’s Wall Street Journal on the Greece situation: Deteriorating Greece Situation Could Force EU’s Hand

Portugal, Italy, and Spain have their own problems as well. It is possible that these all come home to roost all at the same time in 2010. If it does I would not be surprised to see the Euro fall dramatically and the Dollar surge higher. While bubbles lead to deflationary spirals and bailouts lead to inflationary spirals we may be at the tipping point of which is really going to take hold, inflation or deflation. No one has ever been able to offset deflation, ever. So, why do so many people think that we can offset the deflationary spiral now? This is going to be interesting to say the least….my suggestion is to follow the trends and let the markets tell us what to do and how this is going to unfold.

Posted in Economics | 2 Comments »

Correlation, Liquidity Driven Markets, and The Benefit of Managed Futures?

Wednesday, January 27th, 2010

The futures markets and the equities markets seem to be correlating more and more every day over the past 4 years. I first noticed this phenomena back in 2006 and now it is more present than ever. It seems as if there is one big liquidity trade and if money is flowing into the markets both futures and equities go up and if there is money flowing out both futures and equities go down. I have done some testing on this pattern which confirmed my suspicion that long term equity holdings are correlated with long term futures systems. The interesting thing that I found is that combining long term trend following futures trading with short term equities trading seems to yield the best overall results. Short term equities trading is negatively correlated with long term futures trading but long term equities trading is highly correlated with long term futures trading.

This destroys a lot of the myths that you want to add managed futures to an equity portfolio. While it is true that if the trend is down for long enough long term futures traders will eventually get short which will offset equity losses, but the rest of the time they correlate tremendously, much more than people think. To me the true benefit of systematic trading is to add multiple uncorrelated systems such as short term equities with both short and long term futures trading. Managed futures and trend following specifically seem to only help an equities portfolio in a bear market and the rest of the time there is little incremental value.

Take for instance the markets over the past two weeks, they have been almost perfectly correlated. In theory this is not supposed to be the way it should work according to the literature and beliefs that futures systems diversify an equities portfolio. A futures programs that is shorter term and/or not directional may but like I said above I find short term equities in combination with long term trend following to be the best combination.

Posted in Educational, Risk Management, Trend Following | No Comments »

Trend Change in Equities? The Market is Now Overbalanced to the Downside

Wednesday, January 27th, 2010

Overbalance is a term that I believe came from W.D. Gann. It means that when you have a move over a certain period of time that is larger than any other move over that time period which signals a trend change. The example here is the Dow Jones just had the largest weekly drop and the largest 3 day drop since February 2009 thus overbalancing the market to the downside. What this tells me is that we are going to have the largest correction that we have seen since the March bottom. The largest correction was in June and July in which the Dow dropped -8.9% percent. Thus, I anticipate that we will see a larger than -8.9% drop on this move down. If this plays out then we should see prices dip below 9775 on the Dow Jones Industrial Average. The Dow is currently at 10,140. There is support in the 9650-9700 range and below that from 9450-9500. How does the market get down to those levels? I make no predictions that it gets there or that it goes straight down or bounces and then on the next move get there. This is simply what my analysis shows which can be wrong from time to time. I do not pretend to know everything but if I was trading a discretionary account, which I am not at the moment, I would be looking to sell rallies instead of buying dips.

Last week’s volatility really picked up and the pattern has been to have a quiet week after a volatile week and then resume the volatility in the downside direction the week after which in this case is the first week of February. If you look at the monthly charts you may also notice that this is an outside month with what looks like a weak close barring some fireworks in the last couple days of this month. Outside months occur when the high of this month is greater than the previous month and the low is lower than the previous month. Once these outside months occur I then look at the monthly close and if it is near the high or low of the month the next month tends to trade in that direction until the high or low is taken out. My point is that this indicator is not a great trading signal but a great indicator. Thus, if you are short you want to stay short, in this case because the close is looking to be near the low, at least until we trade lower next month. Once we trade below this months low the indicator is confirmed and no longer holds any predictive value. The only way to use this indicator to trade is if we have a bounce early in February in which case I would look to get short and initiate a tight trailing stop once we traded below this months low. If this happens and you take this trade, as with any trade, make sure to use stops and proper money management. This indicator is about 90% accurate but rarely carries a favorable risk reward scenario which is why its an indicator rather than a set-up for a trade.

Posted in Trading | No Comments »

Scott Brown, the Voters, and Politics. The Same As They’ve Always Been!

Monday, January 25th, 2010

Check out this video response by Milton Friedman about the need to change the people in office:

I completely agree with Milton Friedman otherwise how can we account for Scott Brown winning in Massachusetts? That is a state where for every 1 republican there are 3.5 democrats and yet Brown won by a landslide. This vote will completely change the way politicians vote and govern coming into the next election. Friedman is an amazing mind and his wisdom is timeless!

Posted in Uncategorized | No Comments »

Resources

Monday, January 25th, 2010

Check out my updated resources page with tons of amazing and rarely seen video footage of Ayn Rand, Milton Friedman, Naseem Taleb, Julian Robertson and more…

Posted in Economics, Educational | No Comments »

Milton Friedman’s 1980 PBS Series “Free to Choose” Complete Video Set

Monday, January 25th, 2010

I am pleased to share with all of you, on my resources page, the only complete set of legendary economist Milton Friedman’s 1980 PBS series “Free to Choose.” It is based upon his #1 New York Times Best Selling book “Free To Chose.” It is an amazing collection and I encourage you all to watch and enjoy these videos at your leisure.

Posted in Economics, Educational | No Comments »

Poker and Trading

Friday, January 22nd, 2010

This is a great interview of poker superstar Howard Lederer in which he discusses poker and its relation to trading. He spends the majority of the video talking about bet size and money management. He specifically states that he loses more hands than he wins and yet he still makes money. This is often the case in trading where the best traders lose more often than they win but their winners are much larger than their losers. Howard also mentions that those who play less frequent poker hands tend to win the most money. In my opinion what he is really saying is that those who have and follow a “STRATEGY” with “DISCIPLINE” make the most money. I stress both discipline and strategy because without both a trader might as be lost in the desert without water because their chances of survival are slim to none. Lederer also makes mention of folding and how that preserves capital and is a very important part of any successful poker players strategy. In trading having and/or executing a stop loss on every trade is the same thing as folding in poker. It is a necessity for any trader’s long term survival to trade with stop loss orders on every trade.

Posted in Educational, Risk Management | No Comments »

Debt, Government Statistics, and Auditing the Fed

Friday, January 22nd, 2010

Here is a great video from CNBC Europe about the Debt problems in Portugal, the misrepresentation of government statistics around the world, and why the Fed doesn’t want to be audited.

I agree that there are huge debt problems not only facing the US but a whole host of nations around the world. This video makes mention of the fact that several states are running deficits as high as 45% which is gargantuan. Many of the state Pension Plan’s made terrible investment decisions both at the top and the bottom causing short falls of almost $2 trillion in unfunded liabilities. This is only going to make the problem worse. I do not see how this is going to end well for the US and the global financial system as a whole. And the Fed refuses to be audited for one simple reason they are hiding so many things that would prove the real vulnerability of US financial system.

In my opinion there are going to be some great trading markets as result of the madness that is ensuing with the global financial system. My recommendation is to allocate at least 30-40% of your portfolio to managed futures and trend following specifically. Trend following should come out the big winner at the end of this crisis which may last another 7-10 years. My Trading Systems Course outlines many of the strategies that I think will be the most successful over the next 5-10 years.

Posted in Risk Management, Trend Following | No Comments »